Coal prices could rise 16-19 per cent

ABN AMRO Morgans, the Australian consultancy firm and investment bank, has predicted contract prices of thermal coal would rise by 19 per cent and of coking coal by 16 per cent for 2005-06 and most of 2006-07.

Earlier, Smith Barney had predicted coking and thermal coal contract prices would rise by $10 a tonne, to the highest levels in at least 20 years.

Analyst said projections for prices in fiscal 2006 were $69.50 a tonne for coking coal and $50.75 tonne for thermal coal. In February BHP settled coking coal contracts with Japanese steel mills at $59.20 a tonne "" an indicative contract price.

"Thermal coal demand in Asia was expected to remain strong, with India and Japan increasing coal-fired power generation capacity," the bank added.

Smith Barney said China, a net exporter of coking coal last year, would import 5 million tonnes this year and 10 million tonnes in 2005.

Higher prices would push up cost of imported coal for Indian steel producers and thermal coal consumers like power plants, paper and cement plants. Recently, Coal India Ltd had also raised prices.

Producers were likely to seek sustainable higher contract prices rather than seeking one-off gains from pushing contracts to the high spot levels.

"Our estimates indicate by 2006 a number of the coal producers would be completely ungeared or have minimal gearing for meeting the increased demand leading to increased prices," ABN Amro said.

"Users have been suffering from higher contract prices and a further rise in coking coal prices would hit margins," said sources.

Steel Authority was looking at entering into contracts with Australian coal manufacturers instead of procuring coal from the spot market. Spot market prices were higher than contract prices.

On the supply side, Australian and Canadian producers were projected to enhance mining capacity by 20 million tonnes in 2006.

Chinese steel production was projected to reach 360 million tonnes a year by then, raising demand. In addition, thermal coal demand from China was expected to grow 15 per cent a year.

China was the largest thermal coal market in the world, with 80 per cent of its electricity generated by coal-fired stations.